Should the City of Ravenna outsource its income tax department?

The City of Ravenna in Ohio has an income tax on its residents of 2%. For many years, the City had its own income tax department with two employees who processed all of the tax returns from residents. The annual cost of that income tax department was most recently estimated to be $173,000 (“Ravenna will join RITA,” by Diane Smith, Record-Courier, December 12, 2014.)

Ravenna officials contacted the Regional Income Tax Authority (RITA) to get an estimate of what it would cost to have RITA process its residential tax returns instead of processing the returns in-house. RITA is paid a percentage of the city’s income tax. At the current income levels in Ravenna, RITA provided a processing cost estimate of between $150,000 and $160,000 for 2015.

Questions

Based on the cost estimates for 2015, should the City of Ravenna outsource its income tax department? Why or why not?

If city officials expected income levels within the City of Ravenna to decrease over the next several years, how would that expectation impact on the outsourcing decision?

What other factors should have been considered in this outsourcing decision?

Note: The City of Ravenna did indeed outsource its Income tax department as of December 31, 2014, to the Regional Income Tax Agency (RITA).Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.